Gold blowing up

[Steve D'Ippolito]

Nope, it's not. I promise. It's not an investment, it's simply a way to preserve the value of your fiat currency (at this point in time). I say simply, though that does not imply that it is somehow inferior to an alternative. Gold really only functions as a savings vehicle at this point and hopefully at some point, it will be restored to its rightful place as money.

Whoops. My "It's some of both" was in response specifically to this:

So, ask yourself: is it gold that's fluctuating, or is it really the value of the currency?

I was thinking of course of daily price fluctuations, where it certainly makes no sense to hypothesize that the dollar to be going up, then down again in purchasing power like that on a daily basis, in inverse to the price of gold in dollars. And from what I see below, it looks like you agree with the point I was trying to make, even if I did a poor job of doing so.

Yes you're right. It didn't "all of the sudden" lose value. However, when people recognize the value is what changes, or can change, quickly. A rise in gold would typically indicate the first wave of investors or savers (or institutions) recognizing a weakness in the dollar. Let's say that money is being printed at a rate which effectively doubles the money in circulation. I'm sure you don't need too much of an imagination for this...as soon as people realize this, they head towards commodities that offer stability - i.e. gold. The fact of the matter is that the currency has already lost its value with the printing of the money - de facto. This is what happened in 1979 after an average rate of inflation of maybe 3% prior to that. In fact the FED's San Fransisco branch reports that inflation in '79 alone skyrocketed to over 10% (http://www.frbsf.org/publications/economics/letter/2004/el2004-35.html). But, prior to that, there was a steady, albeit "low", inflation of the money supply.

So if I understand you correctly, you are claiming that gold was undervalued at $300 or so an ounce, overcorrected to $850, then settled back down into the $500 range. Of course this does not explain why gold eventually sank to below $300 again, after a lot more time and inflation... and this was a long term shift.

(I know that exchange rates and the like do not solely depend on purchasing power--a currency can be discounted simply because it is inflating and no one wants to hold it. This is why, for example, stuff in Poland was *absurdly* cheap in terms of US dollars when I was there--the expectation that the zloty would continue to drop caused it to be exchanged at a discount that could not be explained by purchasing power alone.)

Yes, some exciting things happened when I was born. I didn't know people would make such a fuss about it...but in truth, do you think, coupled with a dramatic rise in oil prices in a very short period of time and the state of affairs in Iran at the time, this could cause people to get a little jumpy? I think so. Lots and lots of people moved to gold, causing a temporary "self-fulfilling prophecy" before the metal calmed down. But, the damage from inflation was done, which was the real cause, and you saw a dramatic real rise in the price of gold from $35/oz in 1971 to $587.50 on Jan 1, 1981. It then went into a slow downward trend after that for some time while the big "G" was cooking up another scheme to save the world. But, during the 1980s, you really didn't make any money with gold in terms of dollars, but you did preserve the value of your money from erosion. The 90's weren't all that hot for gold either, as an investment. You'd have done better with tech stocks, much better.

Long term, it's not an investment--I believe we are agreed there. (You might make some profitable short term plays--I don't know if we agree there.) I don't expect to become wealthy holding my physical gold, unless we have another 1980 spike. But even there--I got a better return on my coin collection.

I agree that some people do buy gold as a fad, sometimes.

And this can lead to short term price gyrations having nothing to do with a decline (or rise, when the fad ends and the price of gold drops) in the dollar.